At large: Ross Greenwood

High government, corporate and personal debt means this is a time to be cautious

Just a little unsolicited, and plainly obvious, advice. Be a little careful. If you want a higher authority, and you should, note the recent comment of Christine Lagarde, managing director of the International Monetary Fund: “When there are too many clouds, it takes one lightning to start the storm.”

And right now Lagarde cites four major storm clouds: Brexit; the China-US trade war; tight liquidity; and a sharper than expected slowdown in China’s economy.

Lagarde is not short of a colourful phrase to sum up the world economy. In the brilliant documentary Inside Job, which forensically unpicked the 2008 financial crisis, she said to the then US Treasury Secretary Hank Paulson: “We are watching this tsunami coming. And you are just proposing that we ask which swimming costume we are going to put on.”

So her warning now about economic conditions (over which you, our banks and even, to a certain extent, our government and Reserve Bank have little or no control) should be a sobering reminder to not view falls in sharemarkets and property markets as immediate signals to go bargain hunting.

Part of the problem with the confluence of factors slowing down world economic growth (and with it, inevitably, Australia’s economy, as witnessed by the Reserve Bank diluting its growth forecasts this year and next) is that those with the most debt are in the worst positions to deal with the consequences.

As Lagarde herself says: “Cost for enterprises is higher and that happens at a time when there is a heavy debt on sovereign, on corporate and on households.” In other words, borrowing costs are rising because of the increased economic risks, which has an impact on those with most debt.

Now consider this statement from UBS early last year: Australian households’ extremely elevated debt level of nearly 200% compared with their income is “one of the highest in the world”. Which is why banks right now are especially cautious about lending money to all but the very best credit risks and why those who seek to refinance loans are bedevilled with a mountain of paperwork and questionnaires.

The most obvious thing to remind you is that while asset values can rise or fall, debt levels do not change unless you pay down the debt. It’s a reason why an increasing number of people who bought housing with small deposits (especially in Melbourne, Sydney, Perth and Darwin) in the past two years might now be regretting that decision. If they are forced to sell, mainly because they have lost a job, they could discover the rude shock of negative equity.

Investors, including self-managed super- annuation funds, who bought apartments will understand the importance of retaining tenants to keep the cash coming through the door to stop their own savings or salary being depleted by the interest on the investment loan. Banks, to date, have not been impacted by bad or doubtful debts. Indeed, in the Commonwealth Bank’s recent first-half results, the loan impairments were close to their lowest level in six years, at around 0.15% of gross loans (compared with 0.85% in the first half of 2009).

The bank noted: “Home loan arrears decreased slightly on the prior half due to seasonality, partly offset by some households continuing to experience difficulties with rising essential costs and limited income growth. Both personal loans and credit card arrears showed evidence of more muted seasonal benefits due to continued pockets of stress.” Again, to translate, most people are going OK but there are signs of households being affected by rising bills (electricity, health insurance, etc) compared with their relatively flat income growth.

Your problem, for the next few months, is the many people, including politicians and banks, who have a vested interest to talk things up. Their popularity and profit comes from buoyant conditions and confidence. Rarely will they straight-talk with you like Christine Lagarde.

So, in my opinion ... what’s the strategy for 2019? Stay low; stay defensive ... there will be opportunities to buy shares and property but, for most, it’s not just yet. The potential risks have increased and the possible rewards are still not there. Oh, and keep listening to Christine Lagarde.